Tips to Maximise Your Car AllowanceIf you have to use your vehicle for your job, you might be able to negotiate a car allowance with your boss. Read on to find out our top tips to maximise your allowance in Australia, as well as answers to FAQs.
What is a car allowance?
A car allowance is a payment from your employer to help you cover your vehicle’s running costs. These costs include things like:
- tyre replacement
- repairs and maintenance.
A car allowance can also help you to afford to buy a new vehicle by making your loan repayments more affordable. It is also an alternative option to getting a leased company car.
Tip 1: If you use your own vehicle for work, talk to your employer about getting a car allowance.
How does a car allowance work?
If you get a vehicle allowance, it will usually go into your bank account along with your regular pay. It’s designed to help you with your work-related car expenses, but you can use your allowance however you want.
The amount of your allowance will usually be itemised separately to your salary/wages on the payslip you get from your employer. It will also usually be itemised on your payment summary that goes to the Australian Taxation Office at the end of the year.
Car allowance in Australia
Any allowance you get from your employer is regarded as taxable income in Australia. Your employer will include it on your payment summary, so you’ll pay tax on it. That’s the bad news.
The good news is you can deduct your vehicle expenses against your allowance. We’ll talk a bit more about how you can calculate all these expenses later in this article.
Tip 2: Maximise your tax-deductible vehicle expenses against your allowance to minimise the amount of tax you pay.
Car allowance policy
If you’re receiving a vehicle allowance from your employer, the terms and conditions may be spelled out in an allowance policy, including:
- eligibility requirements
- the amount you receive
- the need to keep log books to record kilometres travelled.
Does a car allowance have to be spent on a car?
No, you can spend your allowance on whatever you want.
But obviously you have to pay for your vehicle’s expenses somehow, and a car allowance will certainly give you more income to be able to do that.
According to a recent survey, the average two-car household spends $16,912 a year on running costs for their vehicles. That’s more than $8,000 per vehicle. Any way that can be reduced will help with the household budget.
You can also use your allowance to help you afford to buy a car if you want. For example, to help you with loan repayments.
Tip 3: You don’t have to spend your entire car allowance on your vehicle.
Is a car allowance tax deductible?
It depends on how you look at it.
The allowance amount you receive isn’t tax deductible (it’s income), but you can claim work-related vehicle expenses as a deduction against your income. When you do, you reduce the amount of tax you pay.
The total of your work-related car expenses could be more or less than your allowance income. It depends on the allowance amount you receive and how much you use your vehicle for work.
How to to calculate your tax-deductible car expenses
There are two methods you can use:
1) the log book method, or
2) the cents per kilometre method.
We’ll look at both options in turn.
The log book method
As the name suggests, this method requires you to keep a log book of your work-related travel. You must keep a log book for a continuous period of at least 12 weeks during the financial year.
You must also record your speedo readings for the entire period you’re claiming.
You can then claim the work-related portion of your car’s running expenses, like:
- and decline in value.
For example if you travelled 30,000 kilometres during the year and 6,000 of those kilometres were work-related, you can claim 20% of your vehicle’s running expenses as a tax deduction.
You must keep your log book records for at least 5 years.
Note that you usually can’t claim the cost of driving to and from work. That’s normally regarded as private use of your vehicle. But you can claim the cost of driving that you do for your job during working hours.
You also can’t claim any capital costs of your car, such as:
- the amount you paid for it (or borrowed to pay for it), or
- the cost of any improvements you make to it (like adding tinted windows).
Tip 4: Keep good log book records so you can maximise your tax-deductible expenses.
The cents per kilometre method
This method allows you to claim a maximum of 5,000 kilometres per year at a set deduction rate determined by the ATO.
The current tax-deductible rate for the 2021/22 financial year is 72 cents per kilometre. This rate is designed to cover all of your vehicle’s running expenses and decline in value.
For example, if you drove 4,000 business kilometres over the financial year and you use the cents per kilometre method, you could claim $2,880 as a tax-deductible car expense.
However, you need to be able to show how you worked out the number of kilometres you’re claiming.
Tip 5: If you have do more than 5,000 kilometres of work-related car travel each year, the cents per kilometre method is an option for you to use to work out your tax-deductible expense.
Is a car allowance a business expense?
Yes, it is a business expense for the business providing it. It is treated as an employee expense like salary or wages. Businesses that pay vehicle allowances therefore reduce their business income and pay less tax.
If you’re running a business, it’s an option to consider. Allowances can be a good way to reward and retain your staff.
A car allowance is income to the individual receiving it, not an expense, as explained earlier. But you can claim work-related vehicle expenses against your income to reduce the amount of tax you pay.
Tip 6: If you’re running a business, vehicle allowance expenses are tax-deductible.
Is it better to have a company car or a car allowance?
This depends on your individual situation, needs and goals. There are pros and cons of both options.
The pros of having a company car
- If you have a company vehicle, your employer is responsible for all payments associated with buying and running it. That means less administrative hassle for you.
- But you also may get to drive a better car while you’re working for your employer, depending on the type of company vehicle they provide.
- If you leave your job, you will have to hand a company vehicle back to your employer.
- You may be restricted in the type of vehicle you drive if you choose a company car over the option of getting an allowance.
The pros of having a car allowance
- You won’t have to hand your vehicle back if you leave your job.
- You have more flexibility with the type of car you drive.
- You’ll lose your allowance if you leave your job.
- Your vehicle may not be as good as the company car an employer offers.
- You have to take care of all vehicle payments.
Tip 7: Work out whether a company car or a vehicle allowance would benefit you the most based on your individual circumstances.
Novated lease vs car allowance
You might be wondering whether it’s better to take out a novated lease rather than a vehicle allowance.
A novated lease is an option to finance a car if you work for an employer who offers salary packaging. Salary packaging is also known as salary sacrificing. The employer makes your vehicle lease payments out of your pre-tax wages, so you pay less tax on the lower income you receive.
But you get the benefit of a new car that you can use purely for private purposes, or for a combination of business and private purposes.
Novated lease payments usually include a portion for vehicle running expenses, as well as for its purchase price. You can’t claim novated lease payments as tax deductions.
Employers also have to pay fringe benefits tax (FBT) on novated lease vehicles. The current FBT rate in Australia is 47%.
Not all employers offer salary sacrificing. If your employer doesn’t, a novated lease won’t be an option for you.
Tip 8: If your employer offers salary sacrificing, work out whether a novated lease or a car allowance would benefit you the most based on your individual circumstances. Novated Leases have some hidden costs so it pays to do your research carefully.
Using a car allowance to help with vehicle loan repayments
Car allowances can be used to help with loan repayments. Taking out a loan under a chattel mortgage arrangement is becoming increasingly popular to finance new vehicles. A chattel mortgage is a secured car loan for a vehicle used at least 50% for business purposes. PAYG employees can be eligible for a Chattel Mortgage if you meet this requirement. Secured loans have lower interest rates than unsecured loans.
If you’re running your own business or an employee required to regularly use your vehicle for work, you can use an allowance to help you pay for your secured (chattel mortgage) loan. Doing this can make a more expensive car more affordable for you, or help you to pay it off faster.
Tip 9: You can use a car allowance to help you make vehicle loan repayments.
Other car allowance FAQs
What if I forget to claim my tax-deductible car expenses against my allowance?
You will pay more tax than you need to.
Do I have to use the cents per kilometre method to calculate my tax-deductible expense amount if I travelled less than 5,000 kilometres in the financial year?
No, you can use the log book method if it will give you a higher deduction.
Can I use the cents per kilometre method if I drove more than 5,000 kilometres in the financial year?
No, you must use the log book method.
Is there a minimum or maximum car allowance amount in Australia?
No, but the more you receive, the more tax you will pay if you don’t have significant tax-deductible expenses.
What is the best way to increase my car allowance?
Negotiate with your employer. If you are a valuable staff member, your employer should want to keep you happy.
The bottom line
Car expenses are a major expense for most people. It’s important to consider all your finance options (such as a car allowance, novated lease or secured loan) to determine which is the best option for you.
Tip 10: Weight up all your vehicle finance options before making a decision that’s right for you. If you’re unsure, talk to a broker. They arrange vehicle finance for a living.
How we can help
If you’re looking to buy a new or used car, talk to our expert brokers at Auto Car Loans. We’ll take the time to understand your individual situation before finding you a great deal.
Don’t waste your time trying to find a great deal yourself or let yourself get talked into dealer finance at a car yard. If you do, you’ll end up paying more. We work for our car buying clients, not for lenders or dealers.
We arrange vehicle finance for a living from a panel of over 50 lenders.
Get in touch with one of our experienced finance brokers today by calling 1300 301 051 during business hours.
DISCLAIMER : The thoughts and opinions conveyed on this website are those of the authors only and are of a general nature. This does not constitute financial or general advice to you from Auto Loans Group. You should seek your own independent advice from a professional which is specific to your circumstances before considering any of the items referred to in this article, including finance, insurance, and car buying.